I am a professor of economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a contributor to Bloomberg, the FT, the Economist, Forbes, and other media and President of Economic Security Planning, Inc. -- a company that markets personal financial planning tools at maximizemysocialsecurity.com and economicsecurityplanning.com. Recent books: Get What's Yours -- The Secrets to Maxing Out Your Social Security Benefits, The Economic Consequences of the Vickers Commission, The Clash of Generations (with Scott Burns), Jimmy Stewart Is Dead, and Spend 'Til the End. Follow me on twitter @kotlikoff Circle me on Google+

Ten Nasty Social Security Gotchas To Avoid

Hidden deep within the 2,728 rules in Social Security’s Handbook and the thousands upon thousands of explanations of those rules contained in its Program Operating Manual System are a number of very nasty Catch 22s. My company’s software program – Maximize My Social Security was developed to make sure people neither get caught in Social Security’s traps or leave huge sums on the table because they don’t understand its Byzantine provisions.

Here is my list of Social Security’s worst gotchas. I want to be clear that the system, not the people in Social Security, is generating these gotchas. No one in Social Security is intentionally trying to get any of us to make the wrong decisions or end up with lower benefits than possible. But over the years, the rules governing benefit determination have become so convoluted and indecipherable that even the people working at the local Social Security offices routinely get things wrong.

1. Social Security’s website gives the impression that your spousal benefit is half of your partner’s primary insurance amount (PIA), also called your full retirement benefit. But this is true only if a) you don’t qualify for a retirement benefit on your own or b) you reach full retirement age having never filed for Social Security and, at that point, apply only for your spousal benefit.

Moreover, if you apply for your retirement benefit early, you’ll be forced to also apply for your spousal benefit early if your partner has already filed for his/her retirement benefit. If your partner applies a month after you apply, you’re in the clear. You don’t have to take your spousal benefit early and you can wait until full retirement age to collect an unreduced spousal benefit.

But, and here’s the extra gotcha of this first gotcha, if you time your partner’s application right and aren’t forced to take your spousal benefit early, you’ll still get stuck with the excess spousal benefit, not the full spousal benefit (equal to one half of your partner’s PIA). To be precise, your total benefit will equal your own reduced retirement benefit plus your unreduced excess spousal benefit. And the sum of these two pieces will be less than one half of your partner’s primary insurance amount.

To summarize, if you take your retirement benefit early and aren’t able to time things right with respect to when you and your partner apply for retirement benefits, you’ll end up having to take your excess spousal benefit early. And if you are able to time things right, you’ll end up after full retirement age collecting in total, less than half of your partner’s full retirement benefit.

2. If you and your ex-husband reach full retirement without either of you having filed for your retirement benefit, both of you can collect spousal benefits equal to half the full retirement benefit of the other provided you just apply for your spousal benefit and wait, say, to 70 to collect your retirement benefit.

But if you are married, there’s a gotcha. Only one of you can collect this “free” spousal benefit. In short, the Social Security rules are encouraging you to get divorced. If you do this at least two years before reaching full retirement age, you can both get “free” spousal benefits. You can, as far as Uncle Sam is concerned, continue to live in sin, and get remarried at 70. And if you get divorced after age 60, this won’t affect your survivor benefits if one of you dies. For some couples, where both have had significant earnings, getting this extra “free” spousal benefit can be worth as much as $60,000. A no-fault divorce can cost less than $500. So, …

3. Suppose you drop dead before you start collecting your retirement benefit and before you reach full retirement age. Further assume that you have a low-earning spouse. She/he will be able to collect a survivor benefit equal to your full retirement benefit.

But suppose you started receiving your retirement benefit right before you died. In this case, there’s a gotcha for your surviving spouse. Her/his widow’s benefit will be permanently reduced because it will equal your retirement benefit with the early retirement benefit reduction applied. To make matters worse, if your spouse takes the widow’s/widower’s benefit early, she/he will get hit by the survivor’s benefit reduction fact. Together, these two reductions could reduce your spouse’s widow/widower’s benefit by as much as 47.5 percent.

4. Suppose you work your entire life and pay Social Security taxes week in and week out, but you earn relatively little in absolute terms and also relative to your spouse. You’d think that you’d get something back, at the margin, for all those years of paying, in combination with your employer, 12.4% of every dollar you earn. In fact, you may get not a penny more back in exchange for all the taxes you paid to Social Security, grueling work week after grueling work week, year after year.

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